Top tips for investing into equity crowdfunding

So you have been online and visited a few platforms and you are interested in equity crowdfunding and alternative finance. You have seen a few opportunities that look good to you and you’re keen to know where to start and what would be the best move. This is where some advice on the situation would be great for you. To put it simply, there is no advice.

Top equity crowdfunding platforms and financial advisers do not have the permissions to advise on these investments. Being a new emerging market, the FCA rulings for equity crowdfunding and very early on. A new report has actually just been published by the FCA which is a review on the rulings for equity crowdfunding firms. So you can see that the regulations are still maturing and for now giving advice is a very grey area. However, we can help guide you in the right direction by giving you informative statistics, reports and the top steps to making sure you have all the information and knowledge needed.

Due diligence!

Well due diligence really covers all your tips and is the most important thing to understand and carry out. Due diligence means carrying out the correct steps in order to be clear and informed on what you are investing in. This means making sure what you are reading is true, what the source of this information is, how old it is and why it’s important. Every crowdfunding platform will carry out their own due diligence before any investment opportunities go live however it’s always best to carry out your own so not only can you be sure, but you understand it. Doing your own due dill gives you more of an insight into the background of the business, the key team members, their experience, achievements and failures. Also, don’t tend to be turned off by failures.

Not every business succeeds, around 50% of start-ups fail. A business/entrepreneur showing that they can get back on their feet and not give up is a good sign and also the majority of the time they have experience and will have learnt from their mistakes. It’s all about just trying to gather the correct information but also try not to go too overboard and full “Private Investigator” on the situation. You can never perfectly gather everything and sometimes you can end up exhausting the investment by trying to gather too much and drying out your opportunity. Spend a few hours researching but of course more if you see fit and you believe it’s necessary.

Valuations

Valuations are a lot more important than some realise. It’s key to make sure you are aware what the valuation is of the company you are investing into because this will affect the value of your investment in a similar fashion. If a company has an extremely high valuation and you invest it may be hard to then sell the business down the line for a higher price, resulting in a smaller return than expected. Don’t be put off by a high valuation however, do your research on the company, similar companies and take a look at their accounts and financials and see where it sits. You want to make sure the valuation isn’t unreasonable and unjustified. It can cause future dilution if the business decides to put a high valuation in order to receive them same amount of investment, for a lower share. Take a look below to see an example of this.

Diversification

Diversifying your portfolio is crucial. You should really try to avoid putting all of your investment cash into one opportunity. The reason being, if the company fails, you lose your capital. Around 50% of start-ups fail and realistically you are looking for x10 return on one of your businesses, so by investing in multiple businesses, you have a much better chance of this happening, don’t put your eggs all in one basket! I would recommend considering at least 5. Another thing to take into account, you should not invest any more than you can afford to lose. This should be no more than 10% of your net worth. Be even more considerate if your net worth is tied up in illiquid assets and funds. Remember to try and hold back on some cash for second funding rounds into your chosen businesses if you are keen to not be diluted and keep your share.

Exit

Exit plans should be made clear by businesses, if not then you need to raise some questions and figure out exactly what it is. You should always check this before investing as your cash will be tied into the business and if you are hoping for a return in the next 2-3 years, it’s highly unlikely (unless you are receiving dividends etc). Equity crowdfunded businesses on average take between 5-8 years and really 10 years wouldn’t be a surprising amount of time to wait. Just make sure you have considered the liquidity of this investment, if you can’t afford to lose it for a long period of time then this isn’t for you. This should be your play money and lots of investors actually just tend to write off this money in a hope for a return in future years. They like to get stuck in and have some fun helping the business and watching it grow which is something to consider too, depending on your investment amount (this tends to be more VC’s and angels who invest at least 20%).

Risk

This cannot be stressed enough, please do yourself a huge favour and make sure you always read the risk warnings. They really are there for a reason. You need to really understand the risks involved and that your capital is at risk and could be lost. Each platform will have bespoke warnings tailored to their product and service so make sure before you sign up and invest, you do read them and make yourself aware. It’s important to make sure you fully understand the investment before proceeding. Keep all these tips in mind to make sure you make the most informed and educated decisions. Visit here to see current UK equity crowdfunding investment opportunities.